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US says China 'manipulating' renminbi

January 24, 2009 16:16 IST

Tim Geithner, President Barack Obama's choice for Treasury secretary, on Thursday accused China of "manipulating" its currency and pledged "aggressive" diplomatic action to drive Beijing into action.

The comment - a politically loaded term likely to raise tensions with Beijing - marked the Obama administration's first public intervention in what will be one of its most critical international economic relationships.

The US has long felt that China has artificially depressed the value of its currency to boost exports - to the detriment of US business - but the Bush administration always stopped short of formally declaring China a currency manipulator.

In a written response to questions from senators, Mr Geithner, whose nomination was supported on Thursday by a clear majority of the Senate's finance committee, said: "President Obama - backed by the conclusions of a broad range of economists - believes that China is manipulating its currency." Mr Obama would "use aggressively all the diplomatic avenues open to him to seek change in China's currency practices", he said.

The price of long-term US Treasury bonds fell after Mr Geithner's remarks, with some traders concerned that Beijing might ease up its purchase of US assets. China is the largest foreign holder of US Treasuries after Japan, and more than half of the $5,500bn Treasury market is held by foreign investors.

Mr Geithner stopped short of pledging that the US Treasury would formally name China as an exchange rate manipulator in its annual currency report, due in the spring. "The question is how and when to broach the subject in order to do more good than harm," he said.

Hank Paulson, Mr Geithner's predecessor, repeatedly criticised Beijing for holding down its currency but resisted pressure from Congress formally to name China as a manipulator. US legislation requires only that the administration starts negotiations with any country it so designates.

China abandoned a fixed currency peg with the US dollar in 2005 for a managed float and since then the renminbi has appreciated by about 20 per cent against the dollar.

In November the Chinese authorities let the currency depreciate modestly, prompting speculation about a shift in policy. Since then, the renminbi has traded in a narrow band against the dollar, leading some economists to argue that a de facto peg has been restored.

In spite of the gradual appreciation in the renminbi, China has continued to record large current account surpluses, which are likely to become politically controversial in a global recession.

Mr Geithner's statement will spark controversy in China. In an article published in the Chinese media last week, Zhang Jianhua, head of the central bank's research bureau, said that "wrong economic policies and improper market monitoring (in the US) are the primary reasons for the current financial crisis". He added: "Any attempts to shift the responsibility to other countries reflect an inability to develop the right attitude for seeking solutions."

Mr Geithner's nomination hearing was dominated by concerns about his failure to pay some $34,000 in US taxes while employed by the International Monetary Fund several years ago.

Additional reporting by Michael Mackenzie in New York

Alan Beattie in Washington and Geoff Dyer in Beijing